Labor Market Recap May 2025
The labor market added 139,000 net jobs in May, but with significant revisions of -65,000 and -30,000 to March and April, respectively. The unemployment remained at 4.2%, but the overall employment-to-population ratio fell by 0.3pp, driven by a surge in flows from employment to labor force nonparticipation. Prime-age employment fell to 80.5%, down 0.4pp from six months ago but still 0.5pp above its 2019 average. Prime-age labor force participation fell 0.2pp to 83.4pp.
Overall, the composition of job growth shifted more strongly towards acyclical sectors, with job gains coming primarily from leisure and hospitality, education, and healthcare. Manufacturing employment fell by 8,000 jobs, and employment in residential specialty trade contractors continued to decline, falling by 11,000 jobs. Average hourly earnings growth was strong, with overall private wages growing at an annualized 5.1% in May and production and nonsupervisory wages growing at 4.7%. JOLTS data was uninteresting this month, with a small bump to layoffs, hiring and job openings and a small decline in quit rates.
The jobs data from May isn’t the disaster some have been waiting for, but the headline numbers belie some more worrying details underneath the report. The cumulative revision of -95,000 jobs to the previous two months are sizable, and the imbalance composition of job growth in the labor market has grown. The Fed will be able to lean on the still-low unemployment rate as a reason for them to hold of making any decisions about interest rates, but the outlook for the labor market is not great.
Grinding slower, but not falling off a cliff
The headline numbers today look great, but the details are a little more concerning.
While the unemployment rate remained steady at 4.2% (rounded; there was a slight increase), overall employment rates and labor force participation rates fell. There was a very sharp spike in the labor market flows from employment to labor force non-participation this month.
We may have to wait for the CPS microdata to come out later this month to get a better idea of what is going on. It looks like this is mostly concentrated among young people. Both employment and labor force participation rates for people aged 16 to 24 fell by 0.8pp in May, while participation only fell by 0.2pp for people aged 25 and older.
This doesn’t necessarily mean that a large number of young people lost their jobs last month; it could be a reflection of the low hiring rates we’ve been seeing. Hundreds of thousands of people lose or leave their jobs every month, but if hiring is strong they’ll find another job (and appear as employed in the next survey) or be enticed to stay in the labor force (and appear as unemployed). The magnitude of the flow to non-participation suggests that hiring may be weighing on young people’s employment prospects.
Prime-age employment fell slightly in May, and has been bouncing between 80.4% and 80.9% for the past few years. In terms of levels, this isn’t by any means a bad place to be. But an economy where employment rates aren’t growing isn’t one that is going to be particularly robust to some of the shocks on the horizon.
Full-time employment rates continue to decline, and are now a full percentage point lower than their 2019 average.
Job Growth is Sectorally Imbalanced
A dynamic that we have been tracking for the past few months is that the composition of job growth has narrowed to a handful of acyclical sectors. Earlier this year, it seemed like there was some reversal in this dynamic, with cyclical sectors like manufacturing starting to show some life. But over the past few months, cyclical sectors haven’t been doing so well.
Despite the Administration’s attempts to revive manufacturing through tariffs, we saw a decline in manufacturing employment this month. It seems like threatening to make imported inputs to manufacturing isn’t so great for manufacturing activity and employment.
Meanwhile, while residential building employment rose in May, employment in specialty trade contractors—establishments involved in performing specific construction activities but not responsible for the entire project—continued to decline.
So where are we seeing job growth? It’s mostly coming from acyclical sectors. Together, private education and health services and leisure and hospitality accounted for nearly all of the job growth in May.
We’re really starting to see the impact of federal layoffs in payroll growth. The government is adding little to employment growth now, with outright declines in federal employment that are likely to continue due to the lags between federal layoffs with severance pay and payroll reporting.
Going forward, the labor market appears vulnerable to some of the potential shocks and policy risks over the next few months. Manufacturing (as well as any sector that uses a lot of manufactured goods, such as vehicle services and even healthcare) will be challenged by lingering tariff policy and tariff uncertainty. Construction is likely to slow given the Fed’s desire to maintain high interest rates while tariff and budget policy gets sorted out. State and local government employment, which is currently adding to overall employment, will likely be challenged by Medicaid cuts straining state and local government budgets.
Fed Complacency is a Risk
The Fed meets in a couple weeks, and is expected to hold rates steady. For the last couple months, the overall message from the Committee is that they want to wait and see what the effects of trade and budget policies will be before they make a decision on continuing to cut rates. A large reason why they think they have the luxury of waiting is that the labor market continues to look solid.
At the headline level, the labor market does indeed look solid. The unemployment rate is still low, and Fed officials will be happy to point to that to justify their decision to continue to wait to make a decision about rates. But as the labor market grows more vulnerable, the risk is that monetary policy grows complacent.